TMI Blog2017 (7) TMI 1435X X X X Extracts X X X X X X X X Extracts X X X X ..... e receipts by way of brokerage, commission, interest, rent, charges or any other receipt of a similar nature have to be reduced from the profits. The reason why the items like brokerage etc. have to be excluded is because they do not poses any nexus with export turnover and their inclusion in profits would result in a distortion of the figure of export profit. However, some expenditure incurred for earning these incomes, an adhoc deduction of 10% from such income is to be allowed under this provision. As in the present case, the machinery hire charges are not in connection with export turnover and hence cannot be included in the profit and this will squarely fall under the clause (baa) to section 80 HHC of the Act and CIT(A) rightly directed AO to reduce 90% of net amount. We find no infirmity in the order of CIT(A) and hence the same is confirmed. This issue of assessee s appeal is dismissed. Value of closing stock on account of MODVAT - HELD THAT:- Respectfully, following the Hon ble Bombay High Court Decision in the case of Mahalakshmi Glass Works Private Limited [ 2009 (4) TMI 182 - BOMBAY HIGH COURT] and also upon the decision of co-ordinate Bench of the tribunal in t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... k to the file of AO. Exclude sale tax and excise duty and scrap sale from the total turnover for the purpose of computing deduction under section 80HHC - HELD THAT:- Respectfully, following the Hon ble Bombay High Court decision in the case of Sudarshan Chemicals Industries Ltd. [ 2000 (8) TMI 73 - BOMBAY HIGH COURT] and Hon ble Supreme Court decision in the case of Punjab Stainless Steel Industries [ 2014 (5) TMI 238 - SUPREME COURT] We allow the claim of the assessee and confirm the order of CIT(A). This issue of Revenue s appeal is dismissed. Disallowance u/s 14A - expenditure in relation to exempt income under section 14A - HELD THAT:- In the instant year the end of justice will be met if the order of the AO is upheld as the disallowance u/s 14A made by the AO being 2% of exempt income (interest income and dividend income), falls within the arena of reasonability and Revenue s appeal is allowed. - ITA No.6226/Mum/2004, CO No. 114/Mum/2005 (In ITA No.5981/Mum/2005), ITA No.5981/Mum/2004 - - - Dated:- 7-7-2017 - SRI MAHAVIR SINGH, JM AND SRI RAMIT KOCHAR, AM Assessee by S/Shri J.D. Mistry Nitesh Joshi, AR Revenue by Shri B.C.S. Naik, CIT DR ORDER ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Software 15,000 Crystal Report Software for writing reports 73,000 Software package Security deposit accounting 15,000 Details of Software expenses Software 294,384 Quality Control Programme Software 70,500 Modification to SCALA Software Accounting Package 2000,000 Voyager 355,623 Engineering Span System 144,000 Procurement system ITIL 96,000 Microland Cabling engineering 1,128,837 Total 4,669,343 4. The learned Counsel for the assessee stated that the assessee has claimed software expenses which are for application of software packages which get frequently outdated and have to be replaced. It was also claimed that the application software which get outdated are revenue in nature. The learned Counsel for the assessee state ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... application software therefore respectfully following the decision of the Hon ble Delhi High Court, findings of the CIT(A) are confirmed. Appeal of the revenue is dismissed. 5. The matter was not carried further in appeal. On query from the Bench the learned Sr. DR stated that the issue to cover in favour of the assessee. After hearing the both the sides and going through the facts and circumstances of the case, we find that this issue has been settled by Tribunal in all the earlier years and factually the expenses relates to application of software packages which get frequently outdated and have to be replaced. The expenditure is to be treated as Revenue in nature and we allow the same accordingly. 6. The next issue in this appeal of assessee in ITA No. 6226/Mum/2014 for AY 2000-01 is as regards to the order of CIT(A) confirming the action of the AO and disallowing the expenses of foreign travel. For this assessee has raised following ground No. 2: - Ground No. 2 a. The CIT(A) erred in disallowing Rs.41,14,400/- being 20% of total foreign traveling expenses. b. Without prejudice to above, the appellants submit that in case foreign travel expenses are held as capit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e for A.Y. 1991-92 and 1992-93 and deleted the additions sustained by the CIT(A) the facts being identical. We have no hesitation in following the findings of the Tribunal in assessee s own case (Supra) disallowance sustained by the CIT(A) are deleted. This ground is accordingly allowed. Alternative plea raised by the assessee is dismissed. 9. After hearing both the sides and going through the facts of the case, we are of the view that the issue is fully covered up in favour of assessee and against the Revenue. Respectfully following the Tribunal s decision in assessee s own case in earlier years, we allow the claim of the assessee. 10. The next issue in this appeal in ITA No. 6226/Mum/2004 for AY 2000-01 is as regards to the expenses disallowed by AO and confirmed by CIT(A) of foreign visitors. For this assessee has raised following ground No.3: - The CIT(A) erred in upholding the disallowance of Hotel and airfare expenses incurred on foreign visitors to India amounting to Rs.1,54,201/- on the ground that these expenses were not for the purpose of the business. 11. At the outset, the learned Counsel for the assessee took us through the assessment order Para 10, wher ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... at para 17 of page 36 of its order. The CIT(A) was convinced with the expenditure on travelling of foreign directors and directed the AO to allow this expenditure of Rs.5,56,647/-. However, for the remaining amount, the CIT(A) observed that the assessee has failed to establish the business relevance of the expenditure and confirmed the balance. 41. Aggrieved by this finding, assessee is before us. Counsel for the assessee submitted that in earlier year i.e. A.Y. 1992-93 and 1993-94 similar disallowances have been considered by the Tribunal and counsel requested that the findings may be followed for the year under consideration. The ld. DR fairly conceded to this submission. We have carefully perused the order of the Tribunal for A.Y. 1993-94 in ITA No.334/Mum/1997. We find that identical issue has been considered by the Tribunal at para 38 of page 12 of its order. We find that the Tribunal has given its finding on para 43 of page 13 of its order wherein the Tribunal has followed the findings in assessee s own case for A.Y. 1992-93 and allowed the claim of the expenses. Facts being identical, we have no hesitation in following the findings of the Tribunal in assessee s own case ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... AO is directed to re-compute the deduction u/s 80 HHC by reducing 90% of the net machinery hire charges from the profits of the business. 16. Now, the learned Counsel for the assessee stated that the CIT(A) should have directed the AO to take the entire receipt as business income. On the other hand, the learned Sr. DR supported the orders of the lower authorities. 17. We have heard the rival contentions and gone through the facts and circumstances of the case. We have considered the issue and find that Hon ble Bombay High Court in the case of CIT vs. Bangalore Clothing Co. 127 Taxman 673 (Bom) held that explanation (baa) to section 80HHC of the Act requires that 90% of the receipts by way of brokerage, commission, interest, rent, charges or any other receipt of a similar nature have to be reduced from the profits. The reason why the items like brokerage etc. have to be excluded is because they do not poses any nexus with export turnover and their inclusion in profits would result in a distortion of the figure of export profit. However, some expenditure incurred for earning these incomes, an adhoc deduction of 10% from such income is to be allowed under this provision. As in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... also of Bombay High Court in the case of CIT Vs. Mahalakshmi Glass Works Private Limited (2009) 318 ITR 116 (BOM) wherein Hon ble Bombay High Court in the case of Mahalakshmi Glass Works Private Limited (supra) held as under: - 1. The substantial question of law as raised in this appeal is as under: Whether, on the facts and circumstances of the case and in law, the Hon'ble Tribunal was justified in confirming the order of the Commissioner of Income-tax (Appeals) whereby he directed the Assessing Officer to make adjustment of unutilized Modvat credit to the opening stock and thus ignoring the ratio laid down in Melmould Corporation v. CIT [1993] 202 ITR 789 (Bom) wherein it was held that changing the value of opening stock will lead to chain reaction and hence the same should not be done ? 2. This question has been dealt with and answered by the Delhi High Court in the case of CIT v. Mahavir Alluminium Ltd. [2008] 297 ITR 77 (Delhi). This question concerns the method of valuation of inventory as contemplated by section 145A of the Income-tax Act. In the case before the Delhi High Court, the Assessing Officer contended that section 145A did not permit the assessee to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e. This concession has been recorded in the order. 21. Respectfully, following the Hon ble Bombay High Court Decision in the case of Mahalakshmi Glass Works Private Limited (supra) and also upon the decision of co-ordinate Bench of the tribunal in the case of Sunshield Chemicals Private Limited v. ITO (2015) 64 Taxmann.com 161(Mum-trib.), we hold that unutilized MODVAT credit shall be added to the closing stock of the assessee as at year end which will also necessitate similar adjustments to opening stock in light of the aforesaid decisions cited by us. This issue of assessee s appeal is disposed off as indicated above. 22. The next common issue in ITA No. 6226/Mum/2004 for AY 2000-01 of assessee s appeal and in ITA No. 5981/Mum/2004 for AY 2000-01 of Revenue s appeal is against the order of CIT(A) in confirming the action of the AO in holding that assessee is not eligible for depreciation on assets transfer to Ciba Specialty Chemicals (India) Ltd. pursuant to scheme of demerger. For this assessee has raised following ground No. 6: - 6. (a) The CIT(A) erred in holding that the appellant would not be eligible for depreciation on assets that stood vested in Ciba Specialty C ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... der abovementioned, he upheld the action of the AO in not allowing depreciation on the assets transferred to CSCIL. Following the said decision, I had held likewise in AYs 1998-99 and 1999-00. For the same reasons for the AY under consideration also I uphold the action of the AO in not allowing depreciation on the assets transferred to CSCIL. Accordingly, this issue is decided against the appellants. 2.3 However, in deciding the issue the CIT(A)-XXIV had directed the AO to compute depreciation for A.Y. 1997-98 on the block of assets as reduced by the written down values of assets transferred in the Scheme of Arrangement. Taking the same view, I had held likewise in AYs 1998-99 and 1999-00 and had directed the AO to take the WDV of Block of assets as at A.Y. 1997-98 for computing depreciation In the same vein for the AY under consideration I direct the AO to take the WDV as on 31.3.1999 as arrived after giving effect to the appellate orders for AYs 1997-98 to 1999-00. 24. The learned Counsel for the assessee stated that the Tribunal in assessee s own case for AYs 1997-98, 1998-99 and 1999-2000 in ITA Nos. 5283/Mum/2003 6224 6225/Mum/2004 dated 25.01.2016, wherein this issue ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of assets as existing prior to the transfer of assets, that the reliance placed by the assessee on section 43(6)(c)(i)(B) of the Act was no help to it, that it could not be said that it had not received any consideration or moneys payable as envisaged under section 43 (6), that the AO had rightfully held that the assets transferred by the assessee were not without any consideration, that the shareholders of the assessee company received shares of CSCIL as per the scheme of arrangement sanctioned by the Hon ble, High Court, that CSCIL had paid consideration to the shareholders of assessee, that the transfer of shares was in respect of the assets transferred by the assessee. He further held that AO was not justified in adopting the book value of the assets transferred while reducing the assessee s claim for depreciation, that he should have reduced from the block of asset that the WDV of the transferred assets as per the income tax records and not as per the book value of the assets. He directed the AO to substitute the written down value of the transferred assets by the WDV of the book value of such assets while reducing the value of assets from the block before allowing the assess ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... fact that it is a case of demerger, not of sale or exchange. Last ground of appeal, raised by the assessee, is decided in its favour. We have observed that there is a newly inserted explanation 2A which is inserted by Finance Act 1999 with effect from 01-4-2000 to Section 43(6) of the 1961 Act which has not been considered by authorities below nor the assessee has brought the same to the notice of authorities below and hence we considered it appropriate to restore the issue to the file of the AO for de-novo adjudication of the issue in accordance with law in the light of newly inserted explanation as indicated above and also in the light of decision of the tribunal in assessee s own case for preceding AYs 1997-98, 1998-99 and 1999-2000 in ITA Nos. 5283/Mum/2003, 6224 6225/Mum/2004 dated 25.01.2016 as relied upon by the assessee. We order accordingly. 25. Now, coming to Revenue s appeal in in ITA No. 5981/Mum/2004 for AY 2000-01 is as regards to the disallowance of advertisement expenses and assessee is against not allowing depreciation applicable to plant and machinery at the rate of 25%. For this Revenue has raised the following ground No.2 and assessee in its CO No. 114/ ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sing stock. For this Revenue has raised following ground No. 3: - 3. On the facts and in the circumstances of the case and in law, the CIT(A) erred in directing the AO to delete the addition of Rs.27,42,71 1/- on account of estimated freight., component in the closing stock. And assessee in its CO has raised following ground No.2: - 2. The respondents submit that the AO be directed to increase the value of the opening stock of the subsequent year i.e. assessment year 2001-02 by a similar amount in case the AO's action of enhancing the value of closing stock on account of estimated pro-rata freight on stocks lying at depots is upheld. 29. Similarly, the learned Counsel for the assessee also stated that this issue is decided in earlier years, wherein the Tribunal has dealt with this issue in ITA No. ITA No. 5258/Mum/2003 for AY 1997-98 vide Para 13 and 14 of this order, which reads as under: - 13. Fifth Ground deals with deletion of an addition of Rs.71.70 lakhs made by the AO on account of estimated freight components in the closing stock. It was brought to our notice that identical issue was decided against the department by the Tribunal while adjudicating t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ses are debited to the profit loss account. According to the Advanced Accounts by R.N. Carter (1939 Rev. Edn., Page-32), carriage inwards increases the cost of the goods purchased and is hence debited to trading account whereas carriage outwards is a selling expenses and is debited to profit loss account. In the present case, the goods manufactured by the assessee had to be distributed to the depots across the country from the centralized distribution depot at Bombay and the transporting cost is purely for the purpose of selling the goods. The packaging expenses are not the expenses are not expenses incurred in the primary wrapping of the products, but they have been incurred in packing them in boxes so as to facilitate easy transport to the various depots. The primary packing which makes the product marketable is no doubt part of the cost, but the further packaging carried out for the purpose of transporting the products is part of the selling. William Pickles in his 1960 edition of Accountancy has recognized this by observing at Page 88 of the his treatise that the direct and indirect expenses actually incurred, having regard to the stage of manufacture condition or location ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e appeal for the AY 1991-92 to 1996-97 the Tribunal had partly allowed the expenditure incurred by the assessee on transit houses, that the food and beverages expenditure were allowed by the Tribunal, that the other expenses were disallowed, that the department did not challenge the orders of the Tribunal before the Hon'ble High Court. The order of the Tribunal for AY 1996-97 at para no.16 deals with the issue as under: 16. Ground no.6, filed by the AO, is about deletion of disallowance of Rs.9.69 lakhs u/s.37(4) of the Act, in respect of expenditure incurred by the assessee on transit houses maintained by it at Goregaon and Goa. Before us, AR and DR stated that while dealing with the identical issue in earlier years (AY.1991-92,1993-94to1995-96) the Tribunal had remitted back the issue to the file of the AO for fresh adjudication with regard to food and beverages expenses. He referred to page no.308 of the PB. We have heard the rival submissions and perused the material before us. 16.1. We find that in the appeal decided for the year 1991-92, Tribunal has held as under: It is not in dispute before us that in view of the decision of the Hon b1e Supreme Court in the case of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of incremental liability. In cross objection of assessee s appeal 3. The respondents submit that the AO be directed to allow deduction for payment of Rs.4,25,44,937/- if the action of the AO in not allowing deduction of Rs.2,86, 15,972/-, accrued on account of the payment of pension under the Voluntary Retirement Scheme (hereinafter referred to as VRS) in respect of the workers of the appellants of their erstwhile Rhandup unit is upheld. 32. At the outset, the learned Counsel for the assessee drew our attention to Para 5.2 and 5.3 of CIT(A) s order which reads as under: - 5.2 The said liability for YRS was provided for the first time in the accounting year relevant to A.Y. 93-94 on an actuarial basis by considering the present value of future payment. This liability provided for in March '93 is paid of/ discharged in subsequent years in addition to incremental charge as' applicable. The payment made in any year therefore, Comprises of two elements -one which is relatable to the liability created in March '93 and the second relatable to incremental charge as applicable. It was submitted that part of payment of Rs.4,25,44,937 relates to the liability which ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the paper book which is internal page 15 of order of the Tribunal in assessee s own case for A.Y. 1994-95 in ITA No. 2874/Mum/1999 and ITA No. 2720/Mum/1999. It is a say of the counsel that the Tribunal in that order has restored this issue back to the file of AO. Following the findings of the Tribunal for A.Y. 1993-94, the Ld. DR also agreed to the submission of the counsel, we have carefully gone through the orders of the lower authorities and the order of the Tribunal. We find that the Tribunal in its order at para 40 has followed the findings given by the Tribunal in A.Y. 1993-94 and has restored this issue back to the file of AO to examine and verify the actuary valuation certificate and the agreement with the company and the employee and if he finds that the liability has been calculated on a scientific basis, may allow the claim of the assessee. Facts and circumstances being identical, respectfully following the afore stated direction of the Tribunal in assessee s own case for A.Y. 1994-95, this issue is restored back to the file of AO. The AO is directed to decide in the light of A.Y. 1993-94 and 1994-95. Ground no. 6 is allowed for statistical purposes. Respectfull ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... defined to mean the sale proceeds of any goods which are exported out of India but which will not include freight or insurance. Clause (ba) defines total turnover to exclude freight or insurance. This clause (ba) explains the turnover in a negative manner so as to exclude freight or insurance. Therefore, a combined reading of the above two clauses show that they include anything which has nexus with the sale proceeds. Correspondingly, they show that they exclude everything which has no nexus with the sale proceeds. Further, the meaning of export turnover in clause (b) of the Explanation to section 80HHC, therefore, clearly show that export turnover did not include excise duty and sales tax. Export turnover is the numerator in the above formula whereas total turnover is the denominator. The above formula has been prescribed to arrive at profits from exports. In the circumstances, the above two items, namely, sales tax and excise duty cannot form part of total turnover. In fact, if the denominator was to include the above two items and if the numeration excluded the above two items then the formula would become unworkable. In the circumstances, we are of the view that in order to asc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o items cannot be included in the total turnover. We prefer this interpretation as it advances the object sought to be achieved by the Legislature. Lastly, we are of the view that sales tax and excise duties are levied under separate enactments which have different objects. We are concerned with section 80HHC which is a separate code by itself. Hence, the general definition of the word turnover or the case law dealing with the said definition under Sales Tax Act which is a State levy, cannot be imported into section 80HHC of the Act. Hence, we do not find any merit in these appeals. 37. The learned Counsel for the assessee similarly in respect to scrap sale argued that the issue is covered by Hon ble Supreme Court decision in the case of CIT vs Punjab Stainless Steel Industries (2014) 364 ITR 144 (SC), wherein it is held as under: - 22. So far as the scrap is concerned, the sale proceeds from the scrap may either be shown separately in the Profit and Loss Account or may be deducted from the amount spent by the manufacturing unit on the raw material, which is steel in the case of the respondent-assessee, as the respondent-assessee is using stainless steel as raw material, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... connection with earning of interest income exempt u/s. 10(15) ignoring the fact that the Bombay High court in the case of CIT vs. General Insurance Corporation (125 Taxman 374) had decided the issue regarding deduction u/s.80M. In the instant case, the disallowance has been made in respect of expenditure incurred on earning exempt income and such expenditure is expressly disallowable vide the provisions of Sec.14A of the I.T. Act which have been introduced by the Finance Act 2001 with retrospective effect from 1.4.1962. 40. After hearing both the sides and going through the facts, we find that the CIT(A) following the decision of Hon ble Bombay High Court in the case of CIT v. General Insurance Corpn. of India (No.1) (2002) 254 ITR 203 (Bom), restricting the disallowance at 2% by observing in Para 10.4 as under: - 10.4 On a consideration of the matter I am inclined to agree with the appellant. As pointed out by the appellant a similar issue had arisen in the case of this appellant for AY 1995-96. There, CIT(A)-XXIV on the facts of the instant case and relying upon the decision of the Bombay High Court in the case of General Insurance Corporation (supra) had deleted a simila ..... 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